Debt fears knock stocks, euro, gold rallies

NEW YORK: World stocks and the euro fell on Monday, while gold prices climbed to a record high on fears the debt problems in Europe and the United States may spiral into a global crisis.

European officials and bankers remained divided over steps to keep the fiscal woes of heavy indebted nations from spreading. The euro zone's 17 national leaders meet on Thursday in Brussels in an attempt to finalize a second round of financial aid for Greece worth 110 billion euros ($154 billion).

Anxiety about a potential Greek default and its repercussions across Europe remains high even after stress tests for euro zone banks released on Friday showed most of them have enough capital to weather such an event.

In the United States, as the clock ticks toward the Aug. 2 deadline for an increase in the statutory $14.3 trillion borrowing limit, investors were nervous about the stalemate in Washington and chances of the economy slipping into a recession.

The lack of progress in negotiating a US fiscal package has already led two ratings agencies to warn of a credit rating downgrade in the event of a US default. Such a move, some traders fear, could send interest rates soaring and erode the US dollar's reserve currency status.

"There's a perfect storm happening on a global macroeconomic basis with no debt deal here and the ongoing issues in Europe, and the market is looking at all these things and is fairly anxious," said Oliver Pursche, president of Gary Goldberg Financial Services in Suffern, New York.

These worries knocked Wall Street stocks lower, with the Standard & Poor's 500 index at its lowest in three weeks.

At 11:45 a.m. EDT (1545 GMT), the Dow Jones industrial average was down 172.03 points, or 1.38 percent, at 12,307.70. The Standard & Poor's 500 Index lost 18.47 points, or 1.40 percent, at 1,297.67. The Nasdaq Composite Index was down 41.80 points, or 1.50 percent, at 2,748.00.

European stocks lost 1.7 percent on the day to their lowest levels since early December, while the MSCI world equity index fell 1.3 percent.

As worries over fiscal burdens persist, investors have been scrambling to shelter their money in cash, gold, the Swiss franc, the Japanese yen and other less-risky investments.

"There is still a great concern about the (euro zone) peripheral debt crisis and in the US we have our own issues with the consensus the US is on downgrade watch," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York. "The yen and the Swiss franc are benefiting as safe havens more than the dollar."

The euro was down roughly 0.6 percent versus the dollar and the yen at $1.4038 and 111.07 yen, respectively. The safe-haven Swiss franc hit record highs against the dollar and euro.

Spot gold rose to an all-time peak above $1,600 an ounce after rising more than 3.0 percent for a second straight week last week, a feat it has not achieved since Feb. 2009.

With fears growing that the debt crisis could spread to Italy or Spain, the euro zone's third- and fourth-largest economies, Spanish 10-year government bond yields rose to 6.36 percent, their highest since the introduction of the euro. The Italian equivalent also rose above 6.0 percent.

Europe's debt crisis stoked a mild bid for US government debt, but Washington's stalemate on raising the debt ceiling has limited the appetite for Treasuries.

Prices on the benchmark 10-year Treasury note were up 2/32 for a yield of 2.90 percent, down 1 basis point from late Friday and not far above a seven-month low touched last week.

Worries over sovereign defaults on either side of the Atlantic and their possible toll on the world economy pushed oil prices lower. US crude futures were down 2 percent at $95.55 a barrel.

Copyright Reuters, 2011